A credit rating or score is a number from 0 to 1000, or 0 to 1200 that represents how trustworthy your reputation is as a borrower. It is a summary of all the information on your credit report, and is viewed by credit providers (such as banks or credit unions) when you apply for money or credit.
Credit ratings use a five-point scale of how likely you are to experience an adverse event on your credit report to determine your position. ASIC lists these as excellent, very good, good, average and below average.
You can find out your credit score for free through a website such as Finder. We recommend carefully reading the terms and conditions of these websites before submitting personal information.
Now that you know your credit score, how can you improve it? Below are some helpful hints:
1. Pay your bills on time – this helps show that you consistently and punctually make payments. It is especially important if the bill is for $150.00 or more, as a missed bill of this size can be recorded as a default on your credit report if it is 60 days overdue.
2. Don't apply for any additional credit – lenders and credit reporters can take a dim view on the fact you have applied for new credit despite being in a poor credit position to begin with. This in turn can lower your credit score.
3. Paying off any outstanding loans and debts – where possible, it is best to have dealt with existing loans and debts before applying for credit. Unfortunately, these loans may exacerbate any money issues you are experiencing due to appearing on your credit report until being paid off. This is also a timely reminder that large, or long-term loans, may remain there after you've finished paying them off!
4. Keep your credit card balance low – we recommend that you keep a consistently low balance, rather than having it extremely high at times and then not using it at all later. You may also be able to reduce the size of your outstanding balance by switching to a credit card with a lower interest rate.
5. Check your debt to credit ratio – the lower your ratio the better, so if you are consistently spending the same amount on your credit card, it may be worth considering a higher limit. This way, a $300 credit card balance would only have a ratio of 15% on a $2,000 card, rather than a 30% ration on a $1,000 card.
6. Hold onto safe accounts – if you can maintain a credit account without any negative reports, you may actually improve your credit rating by showing you are consistent and responsible with credit. This may mean you regularly do your spending on your credit card as opposed to doing it out of a transaction account, but pay it off regularly without incurring excessive or regular debt.
7. Diversify your credit – it is good to demonstrate your ability to handle different types of credit at the same time. This may be having a mortgage, car loan and credit card at the same time (with on time repayments!) or, having a mix of short-term and long-term, and fixed payment and revolving credit.